Early retirement of coal-fired power plants: Is Indonesia ready for it?

The plan to shift the world’s energy sources to renewables became more debatable after most European Union countries increased their coal consumption to cope with the world energy crisis.

Ahmad Zuhdi Dwi Kusuma

Ahmad Zuhdi Dwi Kusuma

The Jakarta Post


Indonesia is the world's largest exporter of coal, with prices recently surging to a record high. PHOTO: REUTERS

October 19, 2022

JAKARTA – The prolonged global energy crisis has been a critical point for countries around the world to review their energy-transition plan. Many believe that energy transition has become a secondary priority as countries race to strengthen their energy security amid the surge in fossil fuel prices.

The plan to shift the world’s energy sources from fossil fuels to renewables became more debatable after most European Union countries, which were the motor of the world energy-transition plan, increased their coal consumption to cope with the world energy crisis, as coal is still relatively the cheapest fuel amid the rising energy prices.

For Indonesia, the rising cost of energy has not affected its economy and energy-transition plan to a large extent. Its resiliency is mainly supported by Indonesia’s position as a major coal exporter. However, the impact is still partly there as we have encountered the upward correction of oil prices.

While the world starts to question the feasibility of the energy transition in the short to medium term, Indonesia just recently announced that it will start to shut down some of its coal-fired power plants (PLTUs), at the soonest by the end of 2022. Although this massive yet sudden decision is in line with Indonesia’s grand plan to shift from fossil fuels to renewables, we are aware that there are three disputes regarding the enactment of this policy that are worth discussing.

First, energy security should be a priority over energy transition. It is surprising to see that this policy comes when the world is suffering from surging energy prices resulting from the ongoing energy crisis. The question is how Indonesia can carry out the plan of early retiring its PLTUs without jeopardizing its energy security.

According to the Energy and Mineral Resource Ministry, Indonesia’s electricity mix in 2021 was still dominated by PLTUs which accounted for 50 percent of the total capacity installed (37 gigawatts out of 74 GW). We must be aware that retiring PLTUs will not instantly increase the capacity of its desired substitution, renewables. Thus, this measure will consequently expose Indonesia to energy security risks until the renewable capacity can match that of the substituted PLTUs.

On the other hand, we also believe that the government decision to initiate the early shut down of some PLTUs could be the groundwork for other upcoming policies to accelerate the development of renewable energy.

Second, there is no urgency for Indonesia to phase down its coal use dramatically in the early stages of world’s energy transition. According to data from the BP statistical review, we believe that Indonesia is not among the countries who consume coal massively.

In 2021, Indonesia only consumed approximately 111.97 million tonnes of coal, just 2 percent of the world’s coal consumption. That amount is substantially low compared with other coal-consuming countries such as China, India and even the United States.

At the same time, we understand that being a country which presents an example of persistent efforts to shift from fossil fuels to renewables will generate a formidable reputation globally. However, whether it is worth the risk is still a big question needing to be answered.

Third, coal is threatened with becoming a stranded asset in the near future. According to ministry data, around 84.3 percent of the Domestic Market Obligation (DMO) of coal in 2021 was allocated and used by the electricity sector. Therefore, we expect that coal consumed by this sector will be cut along with the shutting down of some PLTUs.

Furthermore, it is difficult to argue that the amount of coal that was previously consumed by the electricity sector could be reallocated for other use. For example, reallocation of that amount of coal for export could be impractical in the long term as we expect the rise in imported coal demand to be temporary. And also, we doubt that the coal-downstreaming project is ready to process all the stranded coal.

For these reasons, we believe that accelerating the retirement of PLTUs is not an ideal way to deal with the energy-transition plan, especially when energy security is starting to take center stage in the current energy issues. Therefore, we argue that there are some concerns that need to be addressed before escalating the early retirement of PLTUs.

First, the government should formulate better incentives for investors in renewable energy so that the development of renewable energy can match the retirement of PLTUs.

We are aware that the government has just released Presidential Decree No.112/2022 on the acceleration off renewable energy development. However, we feel that most of the point of the price regulation (i.e., maximum price of electricity from renewable power plants) has been made to indirectly protect state-owned electricity company PLN.

We believe that there should not be a maximum price regulation in a market where there is only a single buyer, which is PLN. Moreover, we suggest that the government should raise the buying price of renewable-generated electricity for some period to a level where investors are willing to invest.

Second, we also believe that it is sometimes better to wait, see and adopt what other countries do to stay in line with their energy-transition plan while maintaining their energy security.

As we mentioned before, Indonesia is not among the countries that consume coal the most. So that there will be psychologically enough time to learn and adopt, for example, technologies from the top coal-consuming countries. Technologies that make renewables more affordable, and to prevent coal from becoming a stranded asset.

And the last, we believe that if the government persists in enacting this policy, then it should utilize the current window of the commodity windfall to accelerate renewable energy development. For example, it could set a mandatory use of coal export royalties to support investment in renewable power plants.

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